On Volatility Transmission between Gold and Silver Markets: Evidence from A Long-Term Historical Period

Round 1

Reviewer 1 Report

Comments

Given the recent energy crisis, precious metals progressively have gained a big portion of the market. There is a growing first line research concerning this subject. This paper by investigating the volatility transmission between gold and silver, adds to this topic. Based on their findings it is crucial for individual and institutional investors to design suitable options strategies to capture the volatility transmission. The option strategies can be either directional or pure volatility plays like option calendar spreads, strangles or straddles. Precious metals are attractive assets in a typical asset allocation strategy and the findings of this paper matter both individual and institutional investors.

This paper underlines the importance of precious metals which can be treated both as financial assets and as safe investments depending on investors’ priorities and preferences.

According to my opinion there is a place in the literature for this study. However the paper would be improved substantially if the authors revise it according to the following comments:

1.         In the introduction part the authors explain in a quite well way the added value of this paper. However, the authors should present with clarity the main research hypotheses tested more formally in this section. The research aims part should be in accordance with the proposed methodology.

2.         The structure of the paper is also very sound, and the literature review is focused. However the latter should be extended in some part by including some other relevant papers.

3.         Overall the econometric analysis conducted at this paper is advanced and well justified. However, there are several considerations for improving further the quality and reliability of the empirical part:

       a.         The descriptive analysis should be more comprehensive and critically reflected towards the research objective of the manuscript. For instance:

             i.          The descriptive analysis should be annualized and interpreted comparatively. 

             ii.         Why futures’ market embed higher volatility compared to the spot market?

            iii.        Why monthly returns are higher than weekly?

       b.         The validation of the models should be enhanced by the inclusion of several diagnostic tests in the volatility modelling and in the impulse response parametrization. For instance:

               i.          Is there any heterogeneity on the findings of the stationarity tests across different frequency of data and why?

               ii.         The choice of the GARCH(1,1) model should be justified.

        c.         In the empirical part with the impulse response the authors should comment in detail on any differences between the results using either weekly or monthly data. Are there any implications of this comparison?

d.         The results should be critically compared with the results of extant literature.

4.         The implications of this empirical paper should be justified deeper for financial markets and institutional investors in a more reflective way.

Author Response

1. In the introduction part the authors explain in a quite well way the added value of this paper. However, the authors should present with clarity the main research hypotheses tested more formally in this section. The research aims part should be in accordance with the proposed methodology.

 

Response 1: Investigating the volatility spillover effects among different types of markets such as commodities and stocks, is of crucial importance for understanding the financial dis-tress transmission channel throughout different segmentations of the economy. The volatility informational content is essential for pricing different type of assets and for the development of risk management practices and strategies. This necessity is pro-nounced the last period which is characterized by extended volatility regimes on sev-eral commodities due to the energy crisis and drives many investors to precious metals that is assumed to be a safe heaven. It is astonishing to notice that the conditional volatility context accounts for the flow of information on time series and for the persis-tence of the volatility process which is useful for asset pricing models, volatility trans-mission models, effective risk management, optimal portfolio selection and investment decisions, and volatility strategies.

 

2. The structure of the paper is also very sound, and the literature review is focused. However the latter should be extended in some part by including some other relevant papers.

 

 

Response 2: relevant papers added:

Bouri, Elie, et al. "Uncovering frequency domain causality between gold and the stock markets of China and India: Evidence from implied volatility indices." Finance Research Letters 23 (2017): 23-30.

Dutta, Anupam, Elie Bouri, and David Roubaud. "Nonlinear relationships amongst the implied volatilities of crude oil and precious metals." Resources Policy 61 (2019): 473-478.

Iqbal, Najaf, et al. "Volatility spillovers during normal and high volatility states and their driving factors: A cross‐country and cross‐asset analysis." International Journal of Finance & Economics (2022).

Yaya, OlaOluwa S., Adewale F. Lukman, and Xuan Vinh Vo. "Persistence and volatility spillovers of bitcoin price to gold and silver prices." Resources Policy 79 (2022): 103011.

Cui, Moyang, et al. "Do oil, gold and metallic price volatilities prove gold as a safe haven during COVID-19 pandemic? Novel evidence from COVID-19 data." Resources policy 80 (2023): 103133.

 

3. Overall the econometric analysis conducted at this paper is advanced and well justified. However, there are several considerations for improving further the quality and reliability of the empirical part:
4. The descriptive analysis should be more comprehensive and critically reflected towards the research objective of the manuscript. For instance:
5. The descriptive analysis should be annualized and interpreted comparatively. 
6. Why futures’ market embed higher volatility compared to the spot market?

            iii.        Why monthly returns are higher than weekly?

1. The validation of the models should be enhanced by the inclusion of several diagnostic tests in the volatility modelling and in the impulse response parametrization. For instance:
2. Is there any heterogeneity on the findings of the stationarity tests across different frequency of data and why?
3. The choice of the GARCH(1,1) model should be justified.
4. In the empirical part with the impulse response the authors should comment in detail on any differences between the results using either weekly or monthly data. Are there any implications of this comparison?
5. The results should be critically compared with the results of extant literature.

 

 

Response 3: The authros of the paper have considered carefully this comment and have provided  detailed explanation of the descriptive analysis and justufucation of the econometric approach.

 

 

4. The implications of this empirical paper should be justified deeper for financial markets and institutional investors in a more reflective way.

 

Response 3: This note by using GARCH and VAR modelling, adds to the majority of the rele-vant literature that volatility transmission is unidirectional from gold to silver. It also specified the duration of the shock to approximately 10 months (or 40 weeks). The findings of our empirical research have interesting implications for policy makers and institutional an individual investors. The former should be aware that during non-tranquil periods the so called sift to safe heaven options might result to high vola-tility transmission to precious metals and thus take necessary action to dampen this effect, i.e. by imposing higher fees to enter the market which would potentially prevent contagion risk during periods of economic downturns or crises. Regarding investors perspective, this paper should motivate them to enhance their efforts to apply volatil-ity strategies on precious metals and consider diversifying away potential idiosyncrat-ic components of risk.

Author Response File: Author Response.docx

Reviewer 2 Report

The authors apply GARCH and VAR modelling to study the volatility transmission between gold and silver. The research idea is interesting and has implications to various market participants. However, I have some comments that should be addressed before the paper is considered for publication.

1- In the introduction section, more should be added about the research gap and the necessity to address it under the framework of GARCH and VAR models. Add a paragraph showing the contribution of your study compared to previous studies.

2-The literature review is limited and should be extended by considering related studies such as (1) Do oil, gold and metallic price volatilities prove gold as a safe haven during COVID-19 pandemic? Novel evidence from COVID-19 data. Resources policy, 80, 103133.‏ (2) Extreme implied volatility spillovers and their driving factors: A cross-country and cross-asset analysis. International Journal of Finance and Economics, https://doi.org/10.1002/ijfe.2717  (3) Uncovering frequency domain causality between gold and the stock markets of China and India: Evidence from implied volatility indices. Finance Research Letters, Vol. 23, pp. 23-30. (4) Nonlinear relationships amongst the implied volatilities of crude oil and precious metals. Resources Policy, Vol. 61, pp. 473-478. (5) Persistence and volatility spillovers of bitcoin price to gold and silver prices. Resources Policy, 79, 103011.‏

3- Merge tables 1 and 2 into one table. Furthermore, justify the choice of the sample period and the applied methods in the context of precious metals. The same should be done for the frequency of the data under study.

4-Try to add more economic explanation on the results. Furthermore, elaborate on the following results :”

5-Why the “ Data, Methodology & Empirical Results” are in one single section. Furthermore, why this is followed by section 5? Please reconsider the structure of the paper and the numbering of sections.

6-The conclusion section is limited and should be extended.

7-Add more policy implications for the sake of traders and investors and consider lines for future research.

Author Response

1. In the introduction part the authors explain in a quite well way the added value of this paper. However, the authors should present with clarity the main research hypotheses tested more formally in this section. The research aims part should be in accordance with the proposed methodology.

 

Response 1: Investigating the volatility spillover effects among different types of markets such as commodities and stocks, is of crucial importance for understanding the financial dis-tress transmission channel throughout different segmentations of the economy. The volatility informational content is essential for pricing different type of assets and for the development of risk management practices and strategies. This necessity is pro-nounced the last period which is characterized by extended volatility regimes on sev-eral commodities due to the energy crisis and drives many investors to precious metals that is assumed to be a safe heaven. It is astonishing to notice that the conditional volatility context accounts for the flow of information on time series and for the persis-tence of the volatility process which is useful for asset pricing models, volatility trans-mission models, effective risk management, optimal portfolio selection and investment decisions, and volatility strategies.

 

2. The structure of the paper is also very sound, and the literature review is focused. However the latter should be extended in some part by including some other relevant papers.

 

 

Response 2: relevant papers added:

Bouri, Elie, et al. "Uncovering frequency domain causality between gold and the stock markets of China and India: Evidence from implied volatility indices." Finance Research Letters 23 (2017): 23-30.

Dutta, Anupam, Elie Bouri, and David Roubaud. "Nonlinear relationships amongst the implied volatilities of crude oil and precious metals." Resources Policy 61 (2019): 473-478.

Iqbal, Najaf, et al. "Volatility spillovers during normal and high volatility states and their driving factors: A cross‐country and cross‐asset analysis." International Journal of Finance & Economics (2022).

Yaya, OlaOluwa S., Adewale F. Lukman, and Xuan Vinh Vo. "Persistence and volatility spillovers of bitcoin price to gold and silver prices." Resources Policy 79 (2022): 103011.

Cui, Moyang, et al. "Do oil, gold and metallic price volatilities prove gold as a safe haven during COVID-19 pandemic? Novel evidence from COVID-19 data." Resources policy 80 (2023): 103133.

 

3. Overall the econometric analysis conducted at this paper is advanced and well justified. However, there are several considerations for improving further the quality and reliability of the empirical part:
4. The descriptive analysis should be more comprehensive and critically reflected towards the research objective of the manuscript. For instance:
5. The descriptive analysis should be annualized and interpreted comparatively. 
6. Why futures’ market embed higher volatility compared to the spot market?

            iii.        Why monthly returns are higher than weekly?

1. The validation of the models should be enhanced by the inclusion of several diagnostic tests in the volatility modelling and in the impulse response parametrization. For instance:
2. Is there any heterogeneity on the findings of the stationarity tests across different frequency of data and why?
3. The choice of the GARCH(1,1) model should be justified.
4. In the empirical part with the impulse response the authors should comment in detail on any differences between the results using either weekly or monthly data. Are there any implications of this comparison?
5. The results should be critically compared with the results of extant literature.

 

 

Response 3: The authros of the paper have considered carefully this comment and have provided  detailed explanation of the descriptive analysis and justufucation of the econometric approach.

 

 

4. The implications of this empirical paper should be justified deeper for financial markets and institutional investors in a more reflective way.

 

Response 3: This note by using GARCH and VAR modelling, adds to the majority of the rele-vant literature that volatility transmission is unidirectional from gold to silver. It also specified the duration of the shock to approximately 10 months (or 40 weeks). The findings of our empirical research have interesting implications for policy makers and institutional an individual investors. The former should be aware that during non-tranquil periods the so called sift to safe heaven options might result to high vola-tility transmission to precious metals and thus take necessary action to dampen this effect, i.e. by imposing higher fees to enter the market which would potentially prevent contagion risk during periods of economic downturns or crises. Regarding investors perspective, this paper should motivate them to enhance their efforts to apply volatil-ity strategies on precious metals and consider diversifying away potential idiosyncrat-ic components of risk.

Author Response File: Author Response.docx

Reviewer 3 Report

1. The abstract should be completed with other relevant information

 

2. The state of the art section is less discussed....

You must offer a more detailed analysis regarding rekated work...

are there any similar research studies?

 

 

3. Please, you must answer, at least, to the following questions: 

a. Where can your study be used? 

b. What is the plus value brought by your research to the scientific community?

 

4. You show some tables and graphics and some few lines of explanations

... in my opinion you must discuss better the results of your research.

 

5. What are the limitations of the paper/research?

 

6. What are the future directions for your research ? 

 

7. The conclusion section must be completed... there are 4-5 lines...

 

Author Response

 

 

 

 

1. The abstract should be completed with other relevant information

 Response 1: This note investigates the volatility transmission between gold and silver. By using GARCH and VAR modelling it finds that the volatility transmission from gold to silver is unidi-rectional. Volatility strategies using options can be designed to take advantage of this especially in times where the volatility transmission is not captured by the markets Additionally, the results appear to be useful for gaining better portfolio diversification benefits as well. Investors, for in-stance, could use the results of this study for making proper investment decision during the period of economic downturns or inflation surges.

 

 

2. The state of the art section is less discussed....

You must offer a more detailed analysis regarding rekated work...

are there any similar research studies?

 Response 2:

 similar research studies added:

1. Bouri, Elie, et al. "Uncovering frequency domain causality between gold and the stock markets of China and India: Evidence from implied volatility indices." Finance Research Letters 23 (2017): 23-30.
2. Dutta, Anupam, Elie Bouri, and David Roubaud. "Nonlinear relationships amongst the implied volatilities of crude oil and precious metals." Resources Policy 61 (2019): 473-478.
3. Iqbal, Najaf, et al. "Volatility spillovers during normal and high volatility states and their driving factors: A cross‐country and cross‐asset analysis." International Journal of Finance & Economics (2022).
4. Yaya, OlaOluwa S., Adewale F. Lukman, and Xuan Vinh Vo. "Persistence and volatility spillovers of bitcoin price to gold and silver prices." Resources Policy 79 (2022): 103011.
5. Cui, Moyang, et al. "Do oil, gold and metallic price volatilities prove gold as a safe haven during COVID-19 pandemic? Novel evidence from COVID-19 data." Resources policy 80 (2023): 103133.

 

3. Please, you must answer, at least, to the following questions: 
4. Where can your study be used? 
5. What is the plus value brought by your research to the scientific community?

Response 3: Included in tha abstract and conclusion

 

4. You show some tables and graphics and some few lines of explanations

... in my opinion you must discuss better the results of your research.

 Response 4: According to the descriptive statistics of table 1, there is evidence that the return is higher in monthly data implying that the holding period of one month should be preferred while unconditional volatility of futures market is higher than that of spot market. Similar pattern exhibits the volatility of monthly data which is higher than that of the weekly data. Additionally, the distributional form of the data is leptokurtic and positively skewed in all cases except when dealing with silver market (spot and futures) and weekly frequency

 

5. What are the limitations of the paper/research?

 

6. What are the future directions for your research ? 

 

7. The conclusion section must be completed... there are 4-5 lines...

 

Response 5,6,7:

This note by using GARCH and VAR modelling, adds to the majority of the rele-vant literature that volatility transmission is unidirectional from gold to silver. It also specified the duration of the shock to approximately 10 months (or 40 weeks). The findings of our empirical research have interesting implications for policy makers and institutional an individual investors. The former should be aware that during non-tranquil periods the so called sift to safe heaven options might result to high vola-tility transmission to precious metals and thus take necessary action to dampen this effect, i.e. by imposing higher fees to enter the market which would potentially prevent contagion risk during periods of economic downturns or crises. Regarding investors perspective, this paper should motivate them to enhance their efforts to apply volatil-ity strategies on precious metals and consider diversifying away potential idiosyncrat-ic components of risk.

 

Author Response File: Author Response.docx

Round 2

Reviewer 2 Report

The quality of the revised manuscript is now better. 

Author Response

Proofreading of the manuscript (typo corrections , improvement on  expressions etc.) has been completed.

Reviewer 3 Report

1.  You responded IN PART, to my comments. You need to improve your paper and it can be published.

 

2.  Few comments added in the paper regarding at least, the following, points:

 

a. What are the limitations of the paper/research?

 

        b. What are the future directions for your research ? 

 

I would say... NO limitatuion of YOUR work, no future directions of YOUR work!

 

3. Regarding my point about the abstract si conclusions ... there are only 3 lines added to your abstract!

and more to conclusions!

 

 

 

 

Author Response

1. What are the limitations of the paper/research?

Response: The limitations of this paper is the use of monthly and weakly data. In this way information captured in data of smaller time frames is not captured. On the other had high frequency data contain increased noise which is difficult to be filtered out.

1. What are the future directions for your research? 

Response: Future research could explore the methodology on specific periods (i.e. bull or bear) and examine the behaviour of conditional volatilities particular towards the end of them. The methodology could be enhanced further by incorporating other assets (financial, real estate etc.) and examine the results on a portfolio basis.

 

3. Regarding my point about the abstract si conclusions ... there are only 3 lines added to your abstract!

and more to conclusions!

Response: Several studies estimate the volatility spillover effects between gold and silver returns, but none of them used the implied volatility to evaluate the long-term relationship between these two metal markets. Our paper aims to fill this gap in the existing literature. This note investigates the long-term volatility transmission between gold and silver. By using GARCH and VAR modelling it finds that the volatility transmission from gold to silver is unidirectional. Volatility strategies using options can be designed to take advantage of this especially in times where the volatility transmission is not captured by the markets. Additionally, the results appear to be useful for gaining better portfolio diversification benefits as well. Investors, for instance, could use the results of this study for making proper investment decisions during the period of economic down-turns or inflation surges.

Author Response File: Author Response.docx

Round 3

Reviewer 3 Report

The authors responded, IN PART, to my comments. 

I said: the conclusion should be improved and the abstract has 3-4 lines... 

second review: 7 lines in the abstract

third review: the abstract has 9 lines...

I said in the second review: what are the limitations and future directions?

NO answer.

For now there are some line to this point...it is better.

You need to improve the paper and it can be published. 

Author Response

1. What are the limitations of the paper/research?

Response: Due to the use of monthly and weakly data, information contained in smaller time frames is not captured. On the other hand, high frequency data contain increased noise which is difficult to filter out. Moreover, the volatility of the gold and silver, metals usually included in many investment portfolios, may be masked due their use as port-folio risk diversification constituent. In this way the volatility transmission mechanism between them may be distorted

1. What are the future directions for your research? 

Response: Future research could explore the methodology on specific periods (i.e. bull or bear) and examine the behaviour of conditional volatilities particular towards the end of them. The methodology could be enhanced further by incorporating other assets (fi-nancial, real estate etc.) and examine the results on a portfolio basis. Finally, during the last years inclusion of commodities has been dramatically increased by institutional investors (state funds, pension funds, etc.). Metals (and in particular gold and silver) are portfolio constituents with hopefully positive risk diversification effects. Exten-sions of this research could include the study of the effect of metals’ volatility trans-mission mechanism on the portfolio volatility and its ability to locate low portfolio risk areas.